NETWORK OF CA FIRMS

This query is : Resolved

CA Jaydeep Bhowal (Querist)
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25 May 2009 If two or more ca firms make a network for better functioning of profession, then

Q1. How the network would be assessed under Income Tax Act.?

Q2.What will be the TDS and Service Tax implication ?

Q3.Who will sign the report on behalf of the network?

Q4. How the DEED would be prepered?

CA Tilak Raj Sharma

CA Tilak Raj Sharma (Expert)
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25 May 2009 Please also tell me about it.....

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 Creating a network of Chartered Accountancy (CA) firms involves various considerations under the Income Tax Act, Service Tax (now GST), and professional norms. Here’s how you can approach the different aspects:

### **Q1. Assessment Under the Income Tax Act**

**Network Assessment**:
- **Income Tax Status**: If CA firms form a network but operate as separate legal entities, each firm is assessed independently under the Income Tax Act. The network itself is not a separate taxable entity unless it is formally registered as a separate legal entity, such as a partnership or company.
- **Income Reporting**: Each CA firm in the network must report its income and expenses independently. The firms will file their tax returns separately, reflecting their respective incomes and expenses.

**Documentation**:
- **Income & Expenses**: Each firm will continue to report its income and expenses as per its own books of accounts. The network arrangement itself does not directly affect the income tax calculations unless there are specific income-sharing or expense-sharing agreements that need to be disclosed.

### **Q2. TDS and Service Tax (GST) Implications**

**TDS Implications**:
- **TDS on Payments**: If payments are made from one firm to another within the network, TDS may apply depending on the nature of the payments. For example, TDS on professional fees, interest, or rent must be deducted as per the provisions of the Income Tax Act.
- **TDS Compliance**: Each firm is responsible for deducting and depositing TDS as per the applicable sections of the Income Tax Act. Proper TDS certificates and returns must be filed.

**Service Tax (Now GST) Implications**:
- **Service Tax**: Service Tax was applicable to services rendered and received. If one firm in the network provided services to another, Service Tax would have been applicable as per the rates and rules at that time. However, Service Tax has been replaced by GST.
- **GST**: Under GST, if services are provided by one firm to another within the network, GST would be applicable. The firms should issue GST invoices and comply with GST filing requirements. Each firm in the network is responsible for its GST compliance.

### **Q3. Signing of Reports**

**Professional Reports**:
- **Individual Firms**: Each CA firm in the network must sign reports, audits, or certifications that it is responsible for. The network does not replace individual firm responsibilities.
- **Network Representation**: If a consolidated or joint report is required, the report should be signed by the authorized signatories of each participating firm, as per their respective professional norms.

**Signatory Authority**:
- **Authorization**: The signing authority will depend on the firm's internal policies and the specific engagement terms. The report must be signed by the partners or authorized signatories of the respective CA firms involved in the report preparation.

### **Q4. Preparation of the Deed**

**Deed Preparation**:
- **Agreement Structure**: A network agreement (or deed) between CA firms should outline the terms of the network arrangement, including the purpose, scope, responsibilities, income-sharing, and expense-sharing arrangements.
- **Key Components**:
- **Purpose of Network**: Define the objective of forming the network.
- **Roles and Responsibilities**: Detail the roles and responsibilities of each member firm.
- **Financial Arrangements**: Include provisions for sharing fees, expenses, and profits.
- **Governance**: Describe the governance structure and decision-making processes.
- **Confidentiality**: Ensure confidentiality clauses are included to protect client information.
- **Term and Termination**: Define the duration of the network and conditions for termination.

**Legal Drafting**:
- **Professional Advice**: It’s advisable to have the deed drafted by a legal professional with experience in such agreements to ensure that it complies with applicable laws and adequately addresses all relevant issues.

**Documentation**:
- **Formal Agreement**: The deed should be formalized and signed by authorized representatives of each firm in the network. Ensure that all firms retain copies of the signed agreement.

### **Conclusion**

- **Income Tax**: Each firm is assessed separately unless the network is a separate legal entity.
- **TDS & GST**: TDS and GST compliance must be managed independently by each firm, based on the transactions between them.
- **Signing of Reports**: Each firm signs its own reports. Consolidated reports require appropriate signatories from the involved firms.
- **Deed Preparation**: The network deed should detail all aspects of the network arrangement and be legally drafted and signed by all participating firms.

For a more tailored approach, especially considering legal complexities and specific requirements, consulting with legal and tax professionals is recommended.

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